Thursday May 6 was an odd day in the markets but perhaps not as odd as some may suspect. We pointed out a week earlier how the Dow Jones was pushing some pretty significant resistance, the 61.8% retracement level of the move from the 2007 high to the March 2009 low. The Dow touched that level and failed at the end of April (see chart below).
Add to that an odd consensus between bears and bulls of a significant downturn. Many bears were thinking we were at a historic high and ready for a reversal as the economy is poised for a double dip recession. Many bulls, realizing the market cannot go up forever and seeing that the S&P 500 rallied more than 80% from the March 2009 lows, were expecting a correction, a significant correction of at least 10%.
Now throw in to the mix the problems with Greece and the threat it extends to the other PIIGs (Portugal, Ireland, Italy and Spain) and the Eurozone as a whole. That brings flight to quality buying into the U.S. dollar and Japanese yen, which causes the unwinding of some carry trade positions that may be bankrolling some of these equity positions.
Oh, add to that today is the unemployment report day so many people already expecting a correction may be getting out or tightening stops for fear a bad number could cause a major drop.
And yesterday was a bad day. The S&P 500 was down about 34 points and the Dow about 250 points before things got crazy. There were a lot of people, bulls and bears alike ready to push the sell button.
There are numerous reports that a fat fingered error, involving Procter & Gamble caused the carnage. That may be true. Equity exchanges have busted some of the unusual trades though the CME Group stated “We did not experience technology or systems issues associated with trading activity between 1:00 and 2:00 p.m. CST” and no trades we busted.
What also is true is that is was the worst possible time for such a mistake given all of the factors that had traders on edge and ready to dump.
Even with all of that, the exchanges have to ask what happened to the liquidity. Large liquid markets should not go down that far that fast. In some markets there are participants that are remunerated for providing such liquidity. What happened to those folks as it is obvious, in the parlance of the floor, a lot of market makers put their hands in their pockets.
The move creates problem for technical traders as is the case when an error causes markets to hit extreme levels. How do you treat prices? Whether it was caused by a mistake or not the technical damage is done.
We are curious to know what you think.